Regulatory Competition and Bank Risk Taking

Itai Agur

No 7524, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How damaging is competition between bank regulators? This paper models regulators that compete because they want to supervise more banks. Both banks' risk profiles and their access to wholesale funding are endogenous, leading to rich interactions. The sensitivity of regulatory standards to bank moral hazard, adverse selection, liquidity risk and the degree of regulatory bias is investigated. A calibration suggests that regulatory reform can halve bank default rates. The paper also shows how a decline in regulators' monitoring capacity gives rise to a gradual rise in bank risk, followed by a sudden interbank crisis.

Keywords: supervision; Arbitrage; Bank default; Moral hazard; Interbank market (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-ban, nep-cta, nep-reg and nep-rmg
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